Estate of Ray v. Commissioner

T.C. Memo. 1995-561

UNITED STATES TAX COURT

ESTATE OF DONALD H. RAY, DECEASED, PATRICIA G. RAY,
INDEPENDENT EXECUTRIX, AND PATRICIA G. RAY,
Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent

CIPRIANO DOMINGUEZ AND THE ESTATE OF ISABEL DOMINGUEZ,
DECEASED, CIPRIANO DOMINGUEZ, INDEPENDENT EXECUTOR,
Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket Nos. 4582-93, 4583-93. Filed November 27, 1995.

Thomas E. Redding, for petitioners.

Dennis M. Kelly, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

CLAPP, Judge: Respondent determined additions to

petitioners' Federal income taxes as follows:
 2

Docket No. 4582-93 - Estate of Donald H. Ray, Deceased,
Patricia G. Ray, Independent Executrix,
and Patricia G. Ray:
Additions to tax
Sec. Sec. Sec. Sec. Sec.
Year 6651(a) 6653(a)(1) 6653(a)(2) 6659 6661*

1983 -- $1,489.00 $27,843.54 $8,936.00 $7,447.00
1984 $249.00 3,932.00 1,351.00 539.00 --
*
Determined as an alternative to sec. 6659.

Docket No. 4583-93 - Cipriano Dominguez and the Estate of Isabel
Dominguez, Deceased, Cipriano Dominguez,
Independent Executor:

Additions to tax
Sec. Sec. Sec. Sec.
Year 6653(a)(1) 6653(a)(2) 6659 6661*

1983 $782.00 $14,598.09 $4,693.00 $3,911.00
*
Determined as an alternative to sec. 6659.

Respondent assessed deficiencies in income taxes

attributable to the settlement of petitioners' partnership items.

Separate notices of deficiency, upon which these cases are based,

were issued for additions to tax. There is no dispute that

petitioners settled the partnership items, and, having done so,

petitioners' share of those items became nonpartnership items.

Sec. 6231(b)(1)(C). The only question is whether the notices of

deficiency for additions to tax were issued prior to the

expiration of the applicable period of limitations for

assessment. We hold that respondent issued notices of deficiency

as to the additions to tax at issue in these cases prior to the

expiration of the period of limitations for assessment.
 3

All section references are to the Internal Revenue Code as

in effect for the years in issue, and all Rule references are to

the Tax Court Rules of Practice and Procedure.

FINDINGS OF FACT

These cases are consolidated for trial, briefing, and

opinion. Some of the facts have been stipulated and are found

accordingly. We incorporate by reference the stipulation of

facts and attached exhibits.

Petitioners are the Estate of Donald H. Ray (Mr. Ray),

Deceased, Patricia G. Ray, (Mrs. Ray) Independent Executrix, and

Patricia G. Ray, and Cipriano Dominguez and the Estate of Isabel

Dominguez (Mrs. Dominguez), Deceased, Cipriano Dominguez,

Independent Executor. At the time the petition was filed in

docket No. 4582-93, Mrs. Ray resided in Arlington, Texas. At the

time the petition was filed in docket No. 4583-93, the

Dominguezes resided in Arlington, Texas.

In 1981, Mr. Ray, Mrs. Dominguez, and Robert F. Breese

(Breese) began investing together in various entities. Breese is

a certified public accountant with a bachelor's degree in

business administration in accounting; however, he does not

actively practice in accounting. They formed RDB Joint Venture

(RDB), a Texas general partnership, and Breese managed RDB's

investments. Mr. Ray died in December 1990, and prior to that

time Mrs. Ray did not actively participate in the Rays'

investments. Mrs. Dominguez died in June 1993.
 4

RDB was a partner of Valley Cable, Ltd. (Valley Cable), a

Texas limited partnership, and Valley Cable was subject to the

unified audit and litigation procedures set forth in sections

6221 through 6233 (the TEFRA provisions) enacted by the Tax

Equity and Fiscal Responsibility Act of 1982, Pub. L. 97-248,

sec. 402(a), 96 Stat. 648, and amended retroactively by the

Deficit Reduction Act of 1984, Pub. L. 98-369, sec. 714(p)(1), 98

Stat. 494, 964. RDB was a pass-thru partner as defined in

section 6231(a)(9). Mr. Ray, Mrs. Dominguez, and Breese were

indirect partners of Valley Cable, as defined in section

6231(a)(10), due to their ownership interest in RDB.

In 1984, Mr. Ray, Mrs. Dominguez, and Breese were partners

in 6121 Joint Venture (6121), a general partnership, and RDB

transferred its interest in Valley Cable to 6121. R.D.B.

Investments II, Inc., was not a partner in Valley Cable during

the taxable years 1983 or 1984, and all references to R.D.B.

Investments II, Inc., refer to RDB with respect to the taxable

year 1983 and refer to 6121 with respect to the taxable year

1984. All actions taken in the name of R.D.B. Investments II,

Inc., were intended to be treated as the actions of RDB and 6121

with respect to the taxable years 1983 and 1984, respectively.

For convenience, we will refer to RDB, 6121, and R.D.B.

Investments II, Inc., as RDB.

Respondent designated Valley Cable a litigation project case

and assigned Valley Cable to a litigation project referred to as
 5

Southern Cable. Respondent assigned Peter Palka (Palka) as the

project appeals officer and Albert Balboni (Balboni) as the

project attorney on Southern Cable. Thomas E. Redding (Redding)

was a taxpayer representative in the Southern Cable project, and

he is also counsel for petitioners in these cases.

On March 16, 1987, respondent issued to Valley Cable a

Notice of Final Partnership Administrative Adjustment (FPAA) for

the taxable year 1983, and on May 9, 1988, respondent issued to

Valley Cable an FPAA for the taxable year 1984. After learning

that respondent was challenging the tax deductions claimed by

Valley Cable, Breese took the necessary steps to include RDB in a

"group" formed to challenge respondent's determinations. Redding

was counsel for that group. Victor M. Wilder (Wilder), Tax

Matters Partner (TMP) for Valley Cable, timely filed petitions

for readjustment of partnership items under section 6226 with

respect to Valley Cable's 1983 and 1984 taxable years.

In a letter dated March 25, 1991 (Palka letter), Palka

mailed to Wilder a Form 870-L(AD), Settlement Agreement for

Partnership Adjustments and Affected Items (Form 870-L(AD)), with

a corresponding schedule of adjustments for Valley Cable's

taxable year 1983. A separate Palka letter sent to Mr. Wilder

dated March 25, 1991, contained a Form 870-L(AD) and

corresponding schedule of adjustments for Valley Cable's taxable

year 1984. RDB also received a copy of the Palka letter along
 6

with a copy of the Form 870-L(AD). The relevant portion of the

Palka letter states:

Dear Mr. Wilder:

The Appeals Office has completed settlement
negotiations on the * * * [Valley Cable partnership]
and the results of those negotiations are shown on the
enclosed Form 870-L(AD) and attached schedule of
adjustments. We believe this settlement is a fair and
equitable resolution of the adjustments.

As a partner in the partnership, you have the
right to participate in the settlement. You may either
agree to the settlement of both the penalties and the
partnership items or agree to the settlement of only
the partnership items. (Penalties include interest
under section 6621(c) of the Internal Revenue Code.)
The following instructions explain how you should sign
the settlement agreement (Form 870-L(AD) to show the
extent of your agreement:

If you agree to both the partnership
adjustments and penalties, please sign Parts
I and II of Form 870-L(AD). This will allow
us to close your case with finality on both
the penalty and partnership items.

If you agree only to the settlement of
the partnership items, please sign Part I of
Form 870-L(AD). This will allow us to close
your case with finality for the partnership
items only and will leave open any penalty
issues. A separate report on the penalties
will be mailed to you later which will allow
you to either file a petition to the United
States Tax Court or to file a protest
requesting further Appeals consideration.
However, it is unlikely that the offer shown
in the agreement will be changed unless you
are able to submit facts not previously
considered by the Appeals office.

If you do not agree to the settlement of the
partnership items, a notice of Final Partnership
Administrative Adjustment will be mailed to you on
these items. This notice will allow you to file a
petition with the United States Tax Court, the Claims
 7

Court or a Federal district court where the
partnership's principal place of business is located.
This notice will be mailed to you if we have not heard
from you within 30 days as we will assume you do not
agree with the settlement. If penalties have been
asserted, they will not be included in the notice but
will be included in a separate report which will be
mailed to you after the partnership proceedings are
concluded.

If you wish to accept this settlement as explained
above, the signed agreement form with the attached
schedule of adjustments must be returned within 30 days
from the date of this letter. If a joint return was
filed, both spouses must sign the form (see
instructions on the form). The adjustments shown on
the enclosed agreement form are partnership
adjustments; you may determine your share of these
adjustments by multiplying your percentage of
partnership profit of [sic] loss times the total
adjustments.

Once this settlement is accepted for the
Commissioner, the service center will compute your tax
liability and send you a bill for any additional
amounts.

Please contact the person whose name and number are
shown above if you have any questions regarding this
settlement offer.

A copy of the Form 870-L(AD), parts I and II, is attached to this

opinion as an Appendix.

Breese reviewed the Palka letter, but it did not make sense

to him at the time, so Breese contacted Redding and asked "what

was going on." In a letter dated April 1, 1991, from Redding to

Balboni, Redding highlighted what he perceived to be inaccuracies

in the Palka letter, including the statement that, if the

partners do not agree to the settlement of the partnership items

within 30 days, an FPAA will be issued. When the Palka letter
 8

was mailed, respondent had already issued an FPAA, and the TMP

for Valley Cable had already filed a petition in this Court. In

a letter to Redding dated April 4, 1991, Balboni stated that the

Palka letter was computer generated, that it was incorrect, and

it should not have been sent in that form. In that same letter

Balboni stated:

In order to clear up any potential misunderstanding
caused by the [Palka] letter in these cases, I am
willing to write and send a letter to each of the
partners of Valley Cable, Ltd., or their known
representative, which clarifies the settlement offer
and the deadline for its acceptance.

In an attempt to clarify the Palka letter, Balboni sent a

letter dated April 4, 1991 (Balboni letter), to the partners of

Valley Cable. That letter also was sent to Redding as counsel

for Wilder. The Balboni letter stated:

Dear Sir/Madam:

I am the attorney representing the government in
the above-referenced cases. Our records indicate that
you are a partner in Valley Cable, Ltd. It has just
been brought to my attention that you have received a
letter from the Austin Compliance Center which
communicates an offer by the government to settle the
above-referenced cases. Because that "form" letter is
not entirely correct, I am taking the unusual step of
writing to you in an attempt to clarify the terms of
the settlement and also to set the final deadline for
accepting the offer. If you are represented in this
matter, please forward this letter to your
representative at once.

The "form" letter states that if you do not agree
to the settlement offer within 30 days, a Notice of
Final Partnership Administrative Adjustments will be
issued. This statement is incorrect because such a
notice has already been issued for both the 1983 and
1984 taxable years. Both years are presently docketed
 9

before the United States Tax Court as referenced above.
Although the balance of the Compliance Center letter is
correct, I want to clarify the terms of the settlement,
as well as the manner and time-frame for accepting the
settlement.

First, the settlement offer that you received may
appear confusing at first glance because it is embodied
in a schedule of partnership adjustments. The bottom
line of the settlement offer, however, is that all of
the items reflected on your income tax returns for the
taxable years 1983 and 1984 which flow from your
interest in Valley Cable, Ltd. will be removed from
those returns. You will be allowed an ordinary
deduction in 1983 equal to your partnership percentage
of 1/2 of the total cash invested in the partnership as
determined at the partnership level.

Second, the settlement offer also contains certain
concessions by the government with respect to the
penalties which have been recommended by the
Examination Division in connection with your
participation in Valley Cable, Ltd. The penalties are
not at issue in the partnership proceeding but be
advised that the offer to settle them will expire at
the same time as the offer for the partnership items.
In due course, a statutory notice of deficiency will be
issued to you for the full amount of the recommended
penalties if you choose not to accept the government's
offer while it is available.

Third, the settlement offer can only be accepted
by you if you (and your spouse, if a joint return was
filed) execute the Form 870-L(AD), previously sent to
you by the Compliance Center, and forward it to Mr.
Peter Palka in an envelope postmarked no later than May
6, 1991, which date is the Final deadline for accepting
the offer. If the Form 870-L(AD) is altered in any
way, or if it is accompanied by a cover letter
containing any conditions to the settlement, it will be
considered a counter-offer and therefore a rejection of
the government's offer. Mr. Palka's address is Appeals
Division - I.R.S., 10850 Richmond Avenue, Suite 300,
Houston Texas 77042. The settlement agreement between
you and the government will be consummated only upon
the execution of the Form 870-L(AD) by an authorized
representative of the government.
 10

As stated above, the government's offer to settle
the above-referenced cases, including the penalty
portion, will expire on May 6, 1991. This deadline
will not be extended. However, if a partner of Valley
Cable, Ltd. properly accepts the offer, by law you will
be entitled to what is known as consistent settlement
for a period of 60 days after the government executes
that partner's Form 870-L(AD).

I sincerely hope that this letter eliminates any
confusion which may have been caused by the "form"
letter. As I am the attorney for the government, I
expect that you will consult someone before accepting
my word for all of the above. If you have any
questions, however, please contact the undersigned
* * *.

When Breese received the Balboni letter, he still was overseeing

RDB's investment activities.

The partners of RDB met with William Podsednik, Jr.

(Podsednik), a certified public accountant who had advised them

on various matters since 1988, to discuss what options were

available and whether to accept respondent's proposal. RDB,

through its partners, decided to "accept" respondent's proposal.

Mrs. Ray, acting on behalf of RDB, executed the Form 870-L(AD) on

May 2, 1991. Mrs. Ray executed the Form 870-L(AD) because she

held a majority interest in RDB. RDB forwarded the executed Form

870-L(AD), which applied to the 1983 and 1984 taxable years, to

Redding, who forwarded the document to respondent.

On May 6, 1991, Redding delivered to Palka a letter dated

May 6, 1991. The relevant portion of the letter states:

Dear Mr. Palka:

Attached are separate envelopes containing
settlement acceptances for:
 11

1. [material redacted]
2. [material redacted]
3. R.D.B. Investments II

* * * * * * *

Send copies of each 870-L(AD) to me on behalf of
Victor M. Wilder as the Tax Matters Partner so we can
determine when each settlement is accepted and who
remain partners for notice purposes, etc.

On behalf of the Tax Matters Partner, send me a
copy of the first settlement accepted by the I.R.S. and
your computation of the time period for tendering
requests for consistent settlement offers * * *. I
know several other of my clients do intend to accept
but were not yet ready, or able, to submit an 870-L(AD)
for various reasons.

Redding also delivered to Palka a cover letter dated May 6,

1991, and the Form 870-L(AD) executed by Mrs. Ray as RDB's

authorized representative. The relevant portion of the cover

letter states:

DELIVERED BY MESSENGER

Mr. Peter Palka, Appeals Officer
Internal Revenue Service
10850 Richmond Avenue, Suite 300
Houston, Texas 77042

Re: Valley Cable, Ltd.: 1983-84 Settlement Acceptance;
R.D.B. Investments II, Inc.
TIN: XX-XXXXXXX

Dear Mr. Palka:

Pursuant to Mr. Balboni's letter of April 4, 1991,
enclosed is an executed Form 870-L(AD) on behalf of the
above-referenced taxpayers, accepting the Government's
settlement offer.

Please send me a copy of the fully executed 870-
L(AD) as soon as it is signed on behalf of the Internal
Revenue Service.
 12

Enclosed is my Power of Attorney. Please see that
all further communication with the taxpayer regarding
this matter is made through me.

Respondent's authorized representative executed the Form

870-L(AD) on December 6, 1991. Respondent assessed deficiencies

in income taxes attributable to the settlement of the Valley

Cable partnership items on December 3, 1992, as to the Rays'

taxable years 1983 and 1984. Respondent assessed a deficiency in

income tax attributable to the settlement of the Valley Cable

partnership items on December 4, 1992, as to the Dominguezes'

taxable year 1983. Respondent issued notices of deficiency dated

December 4, 1992, determining additions to tax attributable to

the Rays for the taxable years 1983 and 1984. Respondent issued

a notice of deficiency dated December 4, 1992, determining

additions to tax attributable to the Dominguezes for the taxable

year 1983.

On January 10, 1994, the Rays and Dominguezes each made a

payment in the amount of $5,000 to respondent, which was

designated as a payment of income tax for the taxable year 1983.

OPINION

Under the TEFRA provisions, the tax treatment of partnership

items is decided at the partnership level in a unified

partnership proceeding rather than separate proceedings for each

partner, Boyd v. Commissioner, 101 T.C. 365, 369 (1993), and

"affected items", items affected by the treatment of partnership

items (e.g., certain additions to tax), can only be assessed
 13

following the conclusion of the partnership proceeding. See sec.

6225(a); Maxwell v. Commissioner, 87 T.C. 783, 791 n.6 (1986).

The assessment of tax attributable to partnership items of a

partnership subject to the TEFRA provisions shall be made with

respect to any partner during the period provided by sections

6229(a) through (f). A settlement agreement converts partnership

items to nonpartnership items, and the partner that enters into

the settlement agreement is no longer treated as a party in the

partnership proceeding. Secs. 6226(d)(1)(A), 6231(b)(1)(C). The

period for assessment shall not expire before 1 year after the

date on which the parties enter into a settlement agreement.

Sec. 6229(f). RDB, as a pass-thru partner, entered into a

settlement agreement with respondent with respect to the

partnership items of Valley Cable for the taxable years 1983 and

1984. The settlement agreement entered into by RDB binds

indirect partners, such as the Rays and Dominguezes, with respect

to the partnership items of Valley Cable. Sec. 6224(c)(1). The

dispute in these cases centers on when the parties entered into

the settlement agreement.

Petitioners argue that respondent made a settlement offer

which they accepted when they delivered the executed Form 870-

L(AD) to respondent on May 6, 1991. Respondent argues that the

Form 870-L(AD) embodies the settlement agreement, and that the

agreement became binding when executed by respondent's authorized

representative on December 6, 1991. Respondent contends that the
 14

notices of deficiency dated December 4, 1992, were issued prior

to the expiration of the period of limitations. We agree with

respondent.

General contract law principles govern tax case settlements.

Robbins Tire & Rubber Co. v. Commissioner, 52 T.C. 420, 435-436,

supplemented by 53 T.C. 275 (1969); Smith v. Commissioner, T.C.

Memo. 1991-412. Where the intent of the parties to settle is

evident and the terms of the settlement are otherwise

ascertainable, then a tax settlement agreement may be binding

even if it consists only of letters of offer and acceptance.

Treaty Pines Invs. Partnership v. Commissioner, 967 F.2d 206, 211

(5th Cir. 1992); Haiduk v. Commissioner, T.C. Memo. 1990-506.

Petitioners argue that the Form 870-L(AD) is ambiguous as to

which party is making an offer and which party is accepting the

offer. Respondent argues that the Form 870-L(AD) is not

ambiguous and that it constitutes the settlement agreement

between the parties. Contract law principles generally direct

that we look within the "four corners" of the agreement, unless

it is ambiguous as to essential terms. Rink v. Commissioner, 100

T.C. 319, 325 (1993), affd. 47 F.3d 168 (6th Cir. 1995).

Petitioners contend that the Form 870-L(AD) is ambiguous in

that it sets forth two offers: (1) An offer to enter into a

settlement agreement, and (2) an offer to waive the restrictions

on the assessment and collection of any deficiency. Petitioners
 15

conclude that only the second offer is subject to acceptance for

the Commissioner. Specifically, petitioners argue:

The word "offer" in the second * * * paragraph [of
the Form 870-L(AD)] refers to the last use of the word
"offer" in the first * * * paragraph, which is the
offer to waive the restrictions on assessment and
collection. Simply stated, this language meant that
the assessment and collection of the agreed to
liability could not take place until after the waiver
of those restrictions was accepted on behalf of the
Commissioner. * * * [Fn. ref. omitted.]

We find petitioners' interpretation unconvincing.

Petitioners argue that the term "undersigned", as used in

the Form 870-L(AD), is ambiguous because the Form 870-L(AD)

contained a signature line for both the taxpayer and respondent's

representative. On May 2, 1991, when Mrs. Ray executed the Form

870-L(AD) on behalf of RDB, her signature was the only signature

on the Form 870-L(AD), and she became the "undersigned". We

conclude that petitioners' arguments that the Form 870-L(AD) is

ambiguous are without merit.

Petitioners argue that the Palka and Balboni letters

constitute an offer, and signing the Form 870-L(AD) was the

specified method for accepting that offer. Respondent argues

that, by signing the Form 870-L(AD), petitioners extended an

offer of settlement, and respondent accepted petitioners' offer

on December 6, 1991. Respondent contends that the Balboni and

Palka letters solicited an offer from petitioners and set a

deadline for petitioners to submit the settlement agreement to

the appeals office. The parties do not dispute that an agreement
 16

was reached, but they interpret differently the Palka letter, the

Form 870-L(AD), and the Balboni letter to parallel their

respective arguments as to when the agreement was reached.

The parties argue at length how we should interpret the

Balboni letter, and specifically the sentence that reads:

"The settlement agreement between you and the government will be

consummated only upon the execution of the Form 870-L(AD) by an

authorized representative of the government."

The Balboni letter must be read in light of the Form 870-

L(AD), which contains the following: "the undersigned offers to

enter into a settlement agreement"; "This offer is subject to

acceptance for the Commissioner"; "Unless and until it is

accepted, it will have no force or effect"; "If this offer is

accepted for the Commissioner"; and "Date accepted for

Commissioner". After considering the Balboni letter and the

language in the Form 870-L(AD), we agree with respondent's

interpretation. The Form 870-L(AD) provided that petitioners

submit an offer to respondent. See Gillilan v. Commissioner,

T.C. Memo. 1993-366; H Graphics/Access, Ltd. v. Commissioner,

T.C. Memo. 1992-345; Brookstone Corp. v. United States, 74 AFTR

2d 6025, 94-2 USTC par. 50,474 (S.D. Tex. 1994), affd. without

published opinion 58 F.3d 637 (5th Cir. 1995).

Petitioners' reliance on Treaty Pines Invs. Partnership v.

Commissioner, 967 F.2d 206 (5th Cir. 1992), is misplaced. The

court in Treaty Pines described the record as "sparse" but had
 17

before it the taxpayer's letter purporting to accept the

Commissioner's settlement offer and the Internal Revenue

Service's letter purporting to confirm that the taxpayer had

"accepted the original settlement offer". Id. at 209, 211.

Nothing reveals that the taxpayers in Treaty Pines had before

them a document such as the Form 870-L(AD) that indicated no

settlement would be reached until the 870-L(AD) was accepted by

the Commissioner. The court held that the exchange of letters

was sufficient to constitute a settlement agreement. Id. at 211.

Petitioners, on the other hand, were required to return the

executed Form 870-L(AD) to respondent. Petitioners complied with

this requirement. The language set forth in the Form 870-L(AD)

did not coincide with petitioners' interpretation of the Balboni

letter. The document that petitioners argue constitutes an

acceptance, the Form 870-L(AD), is replete with statements that

RDB was submitting an offer to respondent that did not become

binding until accepted by respondent. After petitioners returned

the executed Form 870-L(AD) to respondent, petitioners never

received any confirmation analogous to the confirmation received

by the taxpayers in Treaty Pines.

The terms of the Form 870-L(AD) and the circumstances under

which the Palka and Balboni letters were created and exchanged

belie petitioners' interpretation of those documents. There is

no doubt that Balboni was not precise in his use of the terms

"offer" and "acceptance". However, after reviewing the entire
 18

record, we find that the parties entered into the settlement

agreement on December 6, 1991, when respondent's authorized

representative executed the Form 870-L(AD). As such, we conclude

that the notices of deficiency issued on December 4, 1992, were

issued prior to the expiration of the applicable period of

limitations.

To reflect the foregoing and the concessions by the parties,

Decisions will be entered

under Rule 155.